Micheal vs Sebastian on 22 March, 2011

[Cites 9, Cited by 4]

Kerala High Court

Micheal vs Sebastian on 22 March, 2011

This appeal is against the decree and judgment dated 22.3.2011 in O.S.No.244 of 2008 of the Sub Court, Kochi by the plaintiff appellant. The suit was filed for recovery of advance amount as well as the amount paid by way of part of sale consideration.

2. The nutshell of the case is as follows:

The plaintiff entered into Ext.A1 agreement for sale with the first defendant for the sale of property owned by him at the rate of Rs.4,50,000/- per cent, on 22.11.2007. At the time of execution of Ext.A1 agreement an amount of Rs.2,00,000/- was paid by way of advance. Later, on 29.1.2008 another amount of Rs.1,75,000/- was also paid to the first defendant towards the sale consideration. But, the contract for sale could not be performed due to the default on the part of the first defendant, as he had not discharged the liability charged upon the property by way of a mortgage and hence the suit was filed for getting back the advance amount along with an amount of Rs.1,75,000/- paid as part of the sale consideration, totalling to an RFA 744/2011 2 amount of Rs.3,75,000/- with interest and costs.

3. The first defendant entered appearance and filed a written statement admitting the execution of Ext.A1 contract for sale and also admitting the receipt of Rs.2,00,000/- by way of advance and Rs.1,75,000/- as on 29.1.2008 out of the sale consideration, totalling to an amount of Rs.3,75,000/-. It was contended by the first defendant that the plaintiff is not entitled return of the advance amount which comes to Rs.2,00,000/- as there is a forfeiture clause in the contract for sale and that he had suffered loss and damages on account of the breach committed by the plaintiff. Due to the non performance of the contract for sale by the plaintiff, the first defendant was forced to execute a sale deed in respect of some other property to a stranger for a throw away price, so as to meet his requirements in connection with the studies of his son.

4. The second defendant entered appearance and contended that he is a bonafide purchaser of the property from the first defendant for a total sale consideration of Rs.13,00,000/- and that later on he had conveyed the property to defendants 3 and 4 for valuable consideration.

5. Defendants 3 and 4 also raised the contentions that they have purchased the property from the second defendant for a total sale RFA 744/2011 3 consideration of Rs.15 Lakhs and they are the bonafide purchasers of the property and hence they pressed for dismissal of the suit.

6. The lower court dismissed the suit mainly on the reason that Ext.A1 is a forged and fabricated document and as such the plaintiff is not entitled to the grant of reliefs prayed for on the basis of Ext.A1 agreement, by its decree and judgment dated 22.3.2011 against which this appeal is preferred.

7. Heard Smt.C.M.Charisma, learned counsel appearing for the appellant and Sri N. Ratheesh, learned counsel for the respondents.

8. The suit was dismissed by the lower court mainly on the ground that Ext.A1 contract is a forged and fabricated document. But, no such case was advanced by the first defendant in his written statement, but admitted the execution of Ext.A1 contract for sale and also the receipt of advance amount of Rs.2,00,000/- and another a mount of Rs.1,75,000/- out of the sale consideration. The contention advanced by the defendants is that the period of the agreement was extended unilaterally by the plaintiff by making some addition in the contract by using the very same scribe and thereby the contract was extended for a further period of six months. It was also submitted that such an addition was made in Ext.A1 contract towards its last portion without the knowledge and consent of the first defendant and RFA 744/2011 4 hence that part of the contract would not bind him.

9. It was submitted by the learned counsel for the respondents/defendants that the material alterations, if any, made in the contract would make the same unenforceable under law and as such a suit for recovery of advance amount and part of consideration based on Ext.A1 contract would not lie. But, we do not find any merit in the said submission simply because of the reason that the material alterations, if any, made in the contract unilaterally by one of the parties will not take away the contract, but it would amount to cancellation of the contract by the person who committed the unilateral material alteration. It will not debar the other party from enforcing the above said contract excluding or ignoring the portion of the said contract materially altered.

10. The question what amounts to material alteration and what would be the effect on contract was came up for consideration before the Privy Council in Nathulal v. Mt. Gomti [AIR 1940 PC 160] and also before the Apex Court in Kalianna Gounder v. Palani Gounder [AIR 1970 SC 1942] and in Loon Karan Sethia v. Ivan E.John [AIR 1977 SC 336]. The Apex Court has in Loon Karan Sethia (supra) concluded thus:-

RFA 744/2011 5

"23. Question No. 5 :- Before proceedings to determine this question, it would be well to advert to the legal position bearing on the matter. As aptly stated in paragraph 1378 of Volume 12 of Halsbury's Laws of England (fourth Edition), "if an alteration (by erasure, interlineation, or otherwise) is made in a material part of a deed, after its execution, by or with the consent of any party to or person entitled under it, but without the consent of the party or parties liable under it, the deed is rendered void from the time of the alteration so as to prevent the person who has made or authorised the alteration, and those claiming under him, from putting the deed in suit to enforce against any party bound by it, who did not consent to the alteration, any obligation, covenant or promise thereby undertaken or made.

A material alteration according to this authoritative work, is one which varies the right, liabilities, or legal position of the parties as ascertained by the deed in its original state, or otherwise varies the legal effect of the instrument as originally expressed, or reduces to certainty same provision which was originally unascertained and as such void, or which may otherwise prejudice the party bound by the deed as originally executed.

The effect of making such an alteraion without the consent of the party bound is exactly the same as that of cancelling the deed."

RFA 744/2011 6

11. Going by the above said legal position, when there is unilateral material alteration, the same amounts to cancellation of the contract. But, at the same time, the other party can opt for enforcing the contract ignoring such material alteration or excluding the portion or portions of such material alteration wholly or in part. A suit for recovery of the advance amount or part of the consideration based on a contract for sale materially altered unilaterally by the plaintiff is governed by Section 65 of the Indian Contract Act and not by the provisions contained in the Specific Relief Act, namely Chapter II Sections 9 to 25 of the Specific Relief Act. The principle laid down under Section 65 is squarely applicable and comes into play so as to bring the party to the stage in which they stood as on the date of contract. A suit for recovery of advance amount or return of advance amount or part of sale consideration is not a suit for enforcing the contract, but it is only one to get back the legal position of the parties as on the date of contract.

12. Regarding the effect of forfeiture clause the legal position is settled that unless there is quantification of damages in anticipation between the parties to the contract, there should be evidence to show the actual damages sustained and that the forfeiture clause would operate only to the extent of injury/damage sustained by the parties. RFA 744/2011 7

13. A five Judges Bench of the Apex Court in Fetch Chand v. Balkishan Dass (AIR 1963 SC 1405) had an occasion to consider the impact of Sections 73 and 74 of the Indian Contract Act and its effect on the forfeiture clause in an agreement for sale of immovable property. The distinction between liquidated damages in anticipation and the penalty imposed by mutual agreement was discussed in detail in that decision and it was held thus:

"8. The claim made by the plaintiff to forfeit the amount of Rs.24,000/- may be adjudged in the light of S. 74 of the Indian Contract Act, which in its material part provides:

"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or as the case may be, the penalty stipulated for".

The section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual RFA 744/2011 8 agreement is regarded as a stipulation naming liquidated damages and binding between the parties, a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty."

10. Section 74 of the Indian Contract Act deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. We are in the present case not concerned to decide whether a contract containing a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by S. 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated, but compensation has to be reasonable, and that imposes upon the Court duty to RFA 744/2011 9 award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damage"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.

11. Before turning to the question about the compensation which may be awarded to the plaintiff, it is necessary to consider whether S. 74 applies to the stipulations for forfeiture of amounts deposited or paid under the contract. It was urged that the section deals in terms with the right to received from the party who has broken the contract reasonable compensation and not the right to forfeit what has already been received by the party aggrieved. There is however no warrant for the assumption made by some of the High Courts in India, that S. 74 applies only to cases where the aggrieved party is seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. In our judgment the expression "the contract RFA 744/2011 10 contains any other stipulation by of penalty"

comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon Courts by S. 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the Court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contact as liable to forfeiture. We may briefly refer to certain illustrative cases decided by the High Courts in India which have expressed a different view.

14. The measure of damages in the case of breach of contract, a stipulation by way of penalty is governed by Section 74 of the Indian Contract Act and reasonable compensation not exceeding the penalty stipulated for is permissible and a guess work on the reasonableness having regard to all the circumstances of the case is also permissible. But the legal position would be different when the sum stipulated reflects a genuine pre-estimate of damages by mutual agreement which is binding on the parties irrespective of whether or not actual damage or loss is proved to have been caused thereby. Application of RFA 744/2011 11 Section 73 would come into play only when there is no penalty stipulated for or no genuine pre-estimate of damages (liquidated damages) was arrived at by mutual agreement in the contract. Section 73 imposes on the party complaining of breach to prove the actual damages or loss caused to him thereby, including loss which would naturally arise in the usual course of things from such breach. So, Section 73 demands proof regarding the loss or damage sustained by the breach of the other party.

15. The expression "earnest money" was considered by a three Judges' Bench of the Apex Court in Maula Bux v. Union of India (AIR 1970 SC 1955) and it was held that "earnest money" is part of the purchase price when the transaction goes forward; it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee. It was also held in that decision that the amount deposited by the contractor as security for guaranteeing due performance of contract for supply of goods cannot be regarded as 'earnest money'. It was held thus:

"In every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree, and the court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the RFA 744/2011 12 breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him."

16. In this case there is no quantification or liquidation of damages in anticipation in the contract by any of the parties stipulating any sum as damages. On the other hand, the terms and conditions of the contract would show that there is only a forfeiture clause agreeing to forfeit the entire advance amount by way of damages and the same cannot be substituted in the place of quantification of damages. A mere clause agreeing to forfeit the entire advance amount alone is not sufficient to bring the matter within the purview of Section 74 of the Contract Act. There should be an un-qualified consensus ad idem in quantifying damages in anticipation by the act of parties in the RFA 744/2011 13 contract for sale, otherwise the person who claims the benefit of forfeiture clause should prove the actual damage or loss sustained by him on account of the breach of other party. The present case would hence, fall under Section 73 of the Contract Act.

17. In the written statement there is only a vague pleading to the effect that the first defendant was forced to dispose of his property at a throw away price due to financial crisis. No evidence was adduced to show the quantum of damage sustained or injury alleged to have been sustained except the interested testimony of the first defendant as DW1. As such, there is no satisfactory evidence to show any injury or damage sustained by the first defendant on account of any breach of contract. In the said circumstances, it is not at all necessary to go into the question who had actually defaulted the performance of the contract for sale, whether it is the plaintiff or the first defendant and hence no further discussion is necessary to hold that the first defendant is bound to return the entire amount received by way of advance together with an amount of Rs.1,75,000/- received towards the sale consideration.

Hence, the decree and judgment of the lower court are liable to be set aside. We do so by granting a decree for recovery of an amount of Rs.3,75,000/- with interest at 6% per annum from the date RFA 744/2011 14 of suit till the date of realisation. Considering the nature of dispute, the parties are directed to suffer their respective costs.

(P.N. Ravindran, Judge) (P. Somarajan, Judge) kav/

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Kerala High Court